November 6 2014 ECO 2023 Notes Post Exam 2 TP Total Product AP Avg Product MP Marginal Product Quantity of Inputs 0 0 3 1 3 3 7 2 10 5 8 3 18 6 21 3 4 5 25 1 5 22 4 40 Law of Diminishing Returns As more and more units of a variable resource are applied to a fixed amount of other resources output will eventually increase by smaller and smaller amounts o We will definitely experience this in the short run o For the long run we could increase the size of the box to help offset the diminishing returns so we won t experience it for the long run Total Product TP The total output of a good a given rate of input Marginal Product MP The change in total product associated with each additional unit of labor Average Product AP The total product divided by the number of variable units labor used to get that total product o AP TP Q o Note Average product INCREASES as long as the marginal product is greater than the previous row s average product Ex your GPA COST CURVES Graph written down on paper Remember the following o ATC is U shaped o AFC falls with output o AVC is a small part of ATC when output is small and a LARGE part of ATC when output is LARGE o MC curve May decrease 1st but then rises MC AVC ATC AVC ATC decreases MC AVC ATC AVC ATC increases Output and Costs in the Long Run The Long Run Average Total Cost Curve LRATC shows the minimum average cost of producing each output level when the firm is free to choose among all possible plant sizes o Outlines the possibilities available in the planning stage Economies of Scale Economies of Scale Occurs when the firm s per unit cost decreases as output increases Diseconomies of Scale Occurs when firm s per unit costs increase as output increases Constant economies of scale occurs hen the firms per unit costs do not change as output changes o Economies and diseconomies of scale are long run concepts where all factors are variable o Increasing and diminishing returns are short run concepts where at least one factor of production is fixed Shifting the Cost Curves Shifters of the cost curves 1 Price of resources a Increase costs go up b Decrease costs go down 2 Taxes a Imposing higher taxes costs go up b Removing decreasing taxes costs go down 3 Regulations a Excessive regulations make costs go up 4 Technology a If used correctly tends to make costs go down iClicker Questions o Which of the following must be true if average total costs are declining Marginal cost is less than average total cost Sunk Costs Sunk Costs costs that have already been incurred as a result of past decisions o Sunk costs should be ignored Don t cry over spilt milk o Looks at the best option moving forward Ex painting your room taking a class Review 1 Understand the principle agent problem 2 Know the difference between economic profits and accounting profits and what we mean by the normal rate of profit 3 Know the difference between short and long run 4 Be able to fill in the cost table 5 Be able to recognize the cost curves and why they slope the way they do 6 Know the law of diminishing returns 7 Know what we mean by economies and diseconomies of scale 8 Understand the idea of sunk costs November 13 2014 Chapter 9 Price Takers and the Competitive Process Price Takers The sellers who must take the market price in order to sell their product o Ex Wheat farmers cattle ranchers Price Searchers firms that choose the price they charge for their product but the quantity they are able to sell is inversely related to price o Ex Nike Sony Nintendo Their products are at least a little bit different than their competitors prices Characteristics of Price Taker Markets 1 There are a large number of firms in the market a Not just one or two businesses competing 2 Each firm produces identical products a Not too much of a difference between products 3 Their output is small relative to the total market a Each producer may produce a lot thousands of units but still small relative to millions of units of total market for example b No one firm dominating market 4 They are able to sell all of their output at the market price 5 There are no barriers to entry or exit of firms in the market a People can jump in out pretty easily without too much hassle too many expenses b Barriers to entry obstacles that limit the freedom of potential rivals to enter and compete in an industry or market i Ex excessive licensing and regulations Graphing Price Taker Markets The market forces of supply and demand determine price P Cannot sell any at higher prices P 6 P MR No incentive to sell at lower prices Q Price takers have no control over this price so the demand for the product of the firm is perfectly elastic o Price takers will be unable to sell any goods at a higher price o Price takers have no incentive to lower price P P Q perfectly elastic below Profit TC TR MC MR Profit 0 1 2 3 4 5 6 7 Quantity 5 6 7 8 4 3 2 2 3 4 6 6 6 P TR TC 17 23 30 38 0 6 12 18 7 7 6 4 Marginal Revenue Marginal Revenue MR the change in total revenue derived from the sale of one additional unit of a product o For a price taker To maximize profits a firm should increase output until marginal revenue is equal to marginal cost o Profit maximizing rule MR MC Note A firm should produce when MR MC A firm should never produce when MC MR 3 3 1 5 4 8 6 12 6 6 6 6 24 30 36 42 Graphically firms should produce where the marginal cost curve intersects the marginal revenue curve o MR MC Q 20 MC P MR should not make more than 5 because then costs will outweigh the benefits P P 0 If we should produce where MR MC then we should produce 5 units 1 0 1 2 Price Taker Firm Q D November 18 2014 Profits and Losses 1 If MR MC occurs above the ATC curve then the firm is making an economic profit 2 If MR MC occurs below the ATC curve then the firm is making an economic loss Remaining Open in the Short Run A firm making losses will remain open in the short run if 1 It can cover its variable costs now 2 Expects price to be high enough in the future to cover all of its costs Otherwise it will shut down The minimum point of the ATC curve is the break even point The minimum point of the AVC curve is the shutdown price Entry and Exit in the Long Run …
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